Jim Gerrish | Part 4: Reduce Feed Costs & Improve Ranch Profitability

[00:00:06]once said, "The key to profitable ranching is keeping it simple."

[00:00:13]The challenge to profitable ranching is keeping it simple. Um, >> yeah, >> we make this very complex.

[00:00:24]uh and the more complex we make it in our minds, the more challenging and least profitable it becomes.

[00:00:34]We're going to think about factors that are the really big ones, important ones when it comes to uh profit in the cattle business. And most of what I'm saying applies equally well to the um uh sheep. Also, goats. I'm not quite as positive uh about where they all come in, but you know, we could sit around and talk about things that we believe might be affecting profit. And you know, computer modeling is a big thing. Um, but there is also something that's called Bobsat modeling.

[00:01:20]And Bob sat modeling, if you don't know what bogs is, is it's a bunch of guys sitting at table where, you know, we just talk about this stuff. And so, you know, there's just some, you know, words written there, uh, that may be important when it comes to determining the profitability of your business. Some are more important than others. Uh, people have a lot of misperceptions about what's important. In the 80s, the big project of the IRM committee was a recordkeeping system called SPA, standardized performance appraisal. And SPA was supposed to become the recordkeeping system that everybody in the beef industry used so that we could compare ourselves across the industry.

[00:02:16]look at, you know, how did we stack up in, you know, our state or county. And of course, like all of these uh great endeavors, it never really came to pass that it was used by everybody in the beef industry, but there was a time in the 80s, 90s, and into the early 2000s where SPA was a uh good database. And we I I use a lot of SPA information.

[00:02:46]And this particular one uh is from the state of Illinois and it includes 158 cow calf herds.

[00:02:57]And so that's where the data analysis it's coming from. Um 158 cow calf herds in Illinois.

[00:03:05]and the committee uh you know they were boat modeling and think about well what are factors that could be affecting profitability and in this particular group uh I believe there were 26 different parameters that you know they said well this might be affecting profitability and then we can do uh and in this case it was I I think referred to earlier stepwise modeling where uh you take those 26 parameters and you start sorting out by what percent of the variation in this characteristic is explained from here and the characteristic we're looking at is profitability in the cow calf business and so in this they started with 26 parameters in the model I have the top eight statistically the top eight factors affecting profitability in these cow calf operations in Illinois. And here's the really interesting one. 57% of the variation in profitability across all of these operations is explained just by feed costs. It is the difference in your feed cost that determines whether or not you're more or less profitable.

[00:04:33]and analysis over the last 40 years from many different states from the industry as a whole. It always comes back to this. It's feed costs and in these various analysis usually will run somewhere between 50 and 70% of the variation in profitability is attributable to feed cost. That's a pretty big deal. Now, what do most of your neighbors talk about at the coffee shop this this time of year? Weaning weight. Well, they might be talking about corn yields, but if they're cattle producers, they're probably talking about weaning weights and bragging about their weaning weights and how important that is. The fifth item down on this list is weaning weight.

[00:05:22]And less than 5% of the variation in profitability across these cow calf enterprises is attributable to weeding weight.

[00:05:32]I have not I'm going to say pretty confidently that in the last 30 years maybe up to 40 years but for sure the last 30 years I have not seen one of these analyses that has weaning weight at anything more than 10% of a factor for determining profitability.

[00:05:54]Four to 7% is where it usually shows up.

[00:05:58]Now, let's think about early January.

[00:06:04]There's a couple of things that start showing up in your mail in early January. What are those? Your tax forms and all the bull catalogs.

[00:06:16]It's a cold winter evening. you're there in your comfy chair by the wood stove and you have the choice of looking at your accounting records and working on your taxes or looking at bull cataloges.

[00:06:29]What are you going to look at?

[00:06:32]Bull cataloges. That's so much more interesting. And you know, we start looking at the weaning weight EPDS and yeah, we're thinking about this bull that we're going to get because we want to up our weaning weight a little bit more.

[00:06:44]that that basically says it's 10 times more important to be looking at your cost accounting records than it is to shop for bulls because cost management is what's going to help you change the profitability of your business not the particular bull that you pick out this year. What is the second most important determinant of profitability according to that list? It says depreciation cost. This is not cow depreciation. This is equipment and facility depreciation. I think I said yesterday that most people are over capitalized in equipment. There's only so much a cow can pay for and most people have more stuff than a cow or a herd of cows is ever going to pay for.

[00:07:32]And according to this analytic, it is the second biggest determinant of profitability.

[00:07:39]What is your equipment and facility invest in investment per cap? Um I want to drop to the bottom one. So this is the number eight item and at 0.7 that's less than 1%.

[00:07:58]And that is herd size.

[00:08:01]Maybe you've been told get big or get out.

[00:08:04]>> Yeah.

[00:08:05]>> You got to have 300 cows to be profitable.

[00:08:08]That's not accurate. According to this, less than 1% of the variation in profitability could be attributed simply to the size of your herd.

[00:08:19]As I pointed out yesterday, Burke Tiker said, small herds can be very profitable if you have all of those other business um practices properly lined up. There's almost nowhere in the United States where agricultural land is priced based on its agricultural productivity, development cost or excuse me development value, recreational value, scenery that is what drives the price of most agricultural land in the country.

[00:08:53]Uh the idea that you can buy land from the agricultural products coming from that land uh is just about a myth. There's just very very few situations where you can actually pull that off these days. I'm going to say from 2027 to probably 2030, cow depreciation will replace feed cost as the biggest line item in cow calf budget because of the high price of cows right now.

[00:09:32]That value of cows is going to go down when we start repopulating the national herd.

[00:09:38]Right now, a call cow, you know, going to the processor can bring over $2,000.

[00:09:49]A call cow four to five years ago, thousand dollars plus or minus. A call cow four or five years from now is probably going to be something a little better than $1,000. I want to say 1,200 bucks. So you pay $3,000 for a cow right now and four years from now you're going to sell her call for 1,200 bucks. My math says that's an $1,800 loss on your investment. And as I said, we'll look at that in detail.

[00:10:24]uh in so we the last cattle cycle price peak we had was 2013 2014 and right on Q from 2017 to about 2020 cow depreciation replaced feed cost as the highest cost of being in the cow calf business. This happens every cattle cycle. the cattle cycle is alive and well and this collapse in cow value it's just over the horizon. So for most uh calf producers that is their biggest line item cost and unfortunately most of your neighbors do not know what it costs them to get to that point of putting hay back out to those cattle. They don't know what the cost of production is. They don't know what the cost of feeding it is. And they probably aren't thinking about what is the opportunity cost of making hay. I am very interested and try to stay up to date on what is happening within the industry and LMIC. Uh if you want a source of accurate financial information um for not only the beef industry but sheep, hogs, chickens, all of that. LMIC is the source that I use. Oh, there it is. Livestock marketing information center. Yeah. Uh okay. So I think these are the most reliable numbers for the cost to, you know, carry a beef cow. And another individual that I'll identify is Neville Spear. Nei L P E R. Neville Spear is my go-to guy. I think he is the best beef economist um in the United States currently. So this is the average annual cost to carry a cow. And this line starts in 1996.

[00:12:41]Uh and this was compiled in 23. Um so in 2023 that cost to carry a cow and if you look at that this is total cash cost plus pasture rent. This is not with overheads and all that. It is cash cost and pasture rent. Um 2023 is the first time that that went over $1,000 a cow in this country and it was at 1088. Now, for whatever reason, LMIC projected that in 24 and 25 the costs were going to come down. And >> yeah, they were wrong because uh we of course don't have 2025 numbers yet because the year isn't over. But one LMIC in another one of the reports um in 2024 that cost went to $1,143 per cap. That's out of pocket operating costs. That's pretty dang scary. Yeah.

[00:13:52]For a 500 pounder, we we were running around two bucks a calf back then. And we thought it was a wonderful price, didn't we? We thought it was a wonderful price. So $1,200 and I'm just using that. Let's put it at $1,200 four or five years ago. Today that calf would barely pay the operating costs.

[00:14:14]It's not paying you any salary back, depreciation cost, the taxes or anything like that. The value of that cat and and I would cheerfully go along with 500 bucks because it would make my illustration, you know, even more potent.

[00:14:31]Yeah. Um sometime over the horizon and they're probably not going to go to as low a price as what they were in, you know, 2020, but going to be worth a lot less than they are today. Uh back when we had that peak uh 2013 2014, the last peak in the uh cattle cycle. So the value of cattle the last time it was really high. Isn't it interesting that our cost of production just rose right up to basically match that peak and then when cattle prices declined our cost of the production fell off some but it never falls back to where it was earlier.

[00:15:24]And we're going to see that same kind of pattern, you know, over the next four or five years. Um, through my career at the University of Missouri, when we talked about stuff like that, we could pretty consistently say that it would cost you $300 to $400 to carry a cow.

[00:15:46]And that that range that goes all the way back basically to 1980. 1980 it got over $300 and then it stayed from 1980 to, [clears throat] you know, 2000 basically in that $300 to $400 range. And then since we got into the 21st century, we have been steadily creeping up. ethanol mandate and drought is what drove that up from 2006 up to the uh peak in 2013 there. And when cattle prices fall, we typically see a slight drop in that cost of production. But you know what? We get in the habit of doing things. Profit, very simple concept.

[00:16:40]income minus costs. So if we think about the revenue side of this equation, you can increase units of production.

[00:16:52]So in our conversation, that brings us back to the concept of carrying capacity and stocking rate.

[00:17:01]We if we're going to try to increase units of production, that means increase stocking rate, we need to have the carrying capacity to support it. So if we're going to try to increase our revenue stream by more production, we have to make our land more productive.

[00:17:21]We can get a higher price per unit. the difference between selling food and selling commodities. That's a big price differential. Adding enterprises, multiecies grazing, fitting some other livestock enterprise in here to without adding tremendously to the cost, but adding another livestock enterprise that's going to capitalize on an unused part of our resource base. Brush in the case of goats, weeds in the case of sheep.

[00:17:55]the pasture poultry stacked onto the grazing enterprise. So we can increase revenue or we can decrease costs and ideally what we would like to do as you might imagine is increase revenue while reducing costs and there are ways that that can happen. Um under the cost category we have two types of costs. We have the operating costs and overhead costs. Uh classic economists tend to call operating costs variable costs because they change with whatever the level of production is that we're operating at. And the overheads they tend to call fixed costs. I do not like the term fixed cost because I don't believe any cost is fixed.

[00:18:45]uh in ranching for profit 35 years ago, I learned to say overheads instead of fixed costs. We change the business model and very often we change or eliminate certain overhead costs.

[00:19:04]That's why to me they aren't fixed. um with both of these operating costs and overhead costs we cannot manage them manage them if we do not know what they are. So variable cost as I say these are things that change with the level of production. Um livestock purchase is the obvious one. If we buy 150 yearlings instead of 100, we're going to have approximately 50% increase in operating cost in the ownership of that yearling.

[00:19:35]And uh anything we do with livestock purchase with yearlings because we're basically turning them over in a single season. um that is an operating cost.

[00:19:47]Investment in a breeding herd um can be viewed as an overhead. Not everybody does, some people do, but investment in a breeding herd where you expect to have those animals over a extended number of years. Um livestock purchase, some people will consider it an overhead. When we get to the cow depreciation section, you'll see why I consider it an operating cost.

[00:20:15]When we're assessing our our finances called gross margin analysis, that's the first evaluation we do. Uh gross margin is the difference between the value of your product and the operating cost to produce it. The gross margin ratio is what is that dollar value of your gross margin divided by the uh value of the product. All right. So if the [clears throat] if our variable cost for maintaining cow is $1,120. So that's kind of consistent of uh where we are right now. I have the cash valued at $1,800 because I made this slide, you know, several months ago because before they became, you know, $2,500. So, the gross margin is $680. It's the $1,800 value of our calf minus the $1,120 cost to care. And if some of you are real economists and you know you're suddenly wanting to split hairs, this is not how we actually would compute it because we do it um this is to show how it's done very simply, but we look at what is the revenue stream of a cow. The revenue stream of each cow unit on your property is a share of the calf crop. a share of the call cow income and a share of call bull income. So there is more revenue per cow than simply its calf and not every cow actually earns the value of a wheat calf because not every cow has a calf when we get into you know deeper details actually working you know with your operation and what you're doing. So now we look at the gross margin ratio and when I talk about gross margin should be greater than 50% it is the gross margin ratio. So in this case we would want to have a gross margin of at least $900. If the gross margin were $900 we would be sitting there at 50% ratio.

[00:22:37]to have a gross margin of $900, we would have to bring our operating cost down from $1,120 per cow to $900 per cap. And so there's your question.

[00:22:51]How are you going to cut $220 out of your operating cost?

[00:22:58]And this is the where we would start the conversation in a consulting visit with a ranch that is currently not operating at the financial um level that we want it to be. We start with the gross margin analysis figure what do we have to get rid of in order order to get our gross margin ratio to something greater than 50%.

[00:23:26]When you look at it from this scenario and you think about, all right, if I had the choice of getting $100 additional revenue or spending $100 less in operating costs, which is actually more favorable to my bottom line of return to assets and it is save $100 in expenses is going to help the percentage return on assets more than adding $100 of revenue is going to do. And so until you get gross margin over gross margin ratio over 50%. Uh your focus needs to be how do I reduce costs, not how do I increase production.

[00:24:19]You know, another way I express it is if you have a 100 cows and you're losing $200 on every head, is 100 having 120 cows going to fix your problem? Probably not. U overhead costs are the ones that we incur regardless, this is the classic definition, regardless of the level of production, these are costs that you incur. Now um my experience has told me that overhead costs actually do change depending on the scale of operation and we'll see some of those details. So things that come uh on the overhead side are land ownership, labor and that would be your salary and any uh paid monthly wages those go in as overheads.

[00:25:11]Uh, one place where I differ with ranching for profit is on day labor.

[00:25:18]I put day labor as a operating cost rather than an overhead because if you weren't doing this particular enterprise, why would you be hiring someone on a dayto-day basis to help you with that?

[00:25:35]And so to me, day labor is an operating cost for ranching for profit. it still goes into their overhead size. And then we have the equipment facility depreciation, utilities, insurance, taxes. And then I have cow depreciation with an asterisk there because some people put it in as an overhead. I do not. I view cow depreciation as an operating cost. All right. So overhead ratio then becomes how much of your total cost of production is coming from the overhead side of this. Uh and then the ratio is overheads divided by gross income. All right. So RMC is ranch management consultants.

[00:26:20]That's the parent organization of the ranching forprofit schools. And if you go to ranching for profit class, they'll tell you overhead ratio needs to be less than 50%. And I've never understood that because if you have a gross margin of 50% and an overhead ratio of 50%, what do you have?

[00:26:44]You have a break even business because all of your costs or excuse me you have enough cost that it is consuming the total value of your product. 50% is an operating cost. 50% is an overhead cost.

[00:27:02]So if you use that 50% target you're setting yourself up I think to just be in a break even position. And because I have looked so hard at so many people's overhead records, my position is we want overhead ratio to be less than 33%.

[00:27:22]So on that 18 Well, I we've got the calculations coming up here. All right.

[00:27:28]So, um we talked about the income per cow as being $1,800.

[00:27:35]uh we figured overheads at 540 in this example. So that's a 30% overhead ratio.

[00:27:45]This this chance this ranch uh certainly has a chance of surviving because the overhead ratio is low enough. Um obviously $600 overhead would put you at the 33% benchmark. So, if you did overhead accounting and you found that you had $740 in overheads, that tells you right now that the profitability of your ranch is at jeopardy. And so, uh, we would strive to see how can we get our overheads reduced from this $740 per cow down to something less than 600. So this uh table here I've got lab labor, land, facilities, equipment, utilities, and then total overhead cost. And we're going from a herd size of zero all the way up to 500. So we have a property that if effectively managed, we could run 500 cows on it.

[00:28:54]If we if somebody bought this who is buying a recreational ranch and they have no interest in raising livestock on it, they're just going to have a wildlife paradise and they're going to hunt and fish and, you know, off-road on it and stuff like that. um you're going to have a caretaker there.

[00:29:19]We're assigning some cost to the use of the land. That isn't the fair market value or a return on investment of it.

[00:29:29]It's just a fee for using that land.

[00:29:33]Facilities.

[00:29:35]Well, um there's going to be something there even if we're running no cows equipment. Now, we got a tractor and a loader to do, you know, maintenance around the place. There's going to be a utility bill. And so, there's a cost of $96,000 running no animals at all. And then as we start increasing the numbers, uh, some of these overheads are staying the same, but we'll see some of them do go up.

[00:30:05]If overheads includes salary and wages and you go from running 50 cows to running 500 cows, it's going to cost you more. Even if this is money, you know that you're earmarking saying, "Okay, this is my salary from being on here. You're going to spend more time dealing with 500 cows than you are 50 cows. So, you need to be paid a little more." We have the land fee fenced because that's just our rental for having this property. But you'll see facilities goes up, equipment goes up, utilities, they're all going up there. And again, this is why I don't call them fixed costs because as we have increased the animal number, we have added to some of these costs. So we've gone from a a overhead cost of 96,000 with no animals on the place to 150,000 because now we're running 500 cows.

[00:31:05]Let's talk about land a little bit. I've already said there's no place in the country where you can buy land based strictly on its agricultural value.

[00:31:15]Now more productive land does generally cost more per acre than less productive land. So this acres per cow this is a measure of productivity of the land and these are you know several years out of date on this pricing but at the time you know I I made this slide uh this is what different land might be costing per acre. So if we take the acres required per cow times the value of the land we end up with land cost per cap and uh you know it's kind of gradually going up there stabilizing and it might fall down. The point to make here is this isn't a linear response.

[00:32:07]You can't automatically presume that if you pay more per acre for land, it's going to cost you more to run cows there because the land is more productive. You can't buy the cheapest land there is and say, "Well, that's going to be the least expensive place to run cows." Because here's this $600 an acre and it takes 20 acres to carry a cow. That's $12,000 investment cow. Well, here's really productive land and it's costing us less on a per cow basis to be on that more productive land. Um, so just understand that there's not a linear relationship between carrying capacity and the investment that you're going to make per carry for land uh land base. And I used to do stuff like this and try to figure out, okay, what is the maximum that I can invest per cow in a ranch and and have it pay off? You know, some I meet people who aren't from a ranching background. They're from a business background. midlife crisis is they decide, you know, they need to own a western ranch somewhere and, you know, they want to know uh what kind of return on investment can they expect, what they what can they charge the neighbor rancher for leasing it. And this just takes all of these investment per cows, looks at a return on investment, and if we were to say that, you know, $100 is the most that we could afford, you know, to charge against our cow for the land, 1% return on investment at these lowest investment costs. We get all the way out here and we're looking at, you know, high hundreds into thousands of dollars.

[00:34:12]Um, I mean, that that's the rental rate that you would have to charge to make, you know, a 10% invest return on investment, you know, $1,400 per cow just for land use. There's nobody going to do that.

[00:34:31]you know, at today's mark, even at today's market, that's not going to work. And so the an idea of an outside investor buying ranch land, expecting, you know, rental to pay for that land. I mean, you can do that with commercial real estate in the city, but in the ranch world, that doesn't work. You know, I firmly believe, and again, this is something I took home from ranching for profit a long time ago, is land ownership and ranching operations are two very separate businesses.

[00:35:08]I don't think I have a slide in here that says this. Some people think to get into the ranching business, the first thing they have to do is buy a piece of property.

[00:35:20]Land ownership is not a prerequisite for profitable ranching.

[00:35:27]To me, land ownership is the reward that you receive after a I don't want to say life, but after doing your time in profitable ranch operations.

[00:35:45]If you start out by buying land, very often you have no financial reserves or leverage to stock that property to do any improvements to it. You all you have is a millstone around your neck because you bought that property.

[00:36:05]The uh great starting point is custom gray somebody else's cattle on somebody else's property.

[00:36:15]When you can make money doing that, then you buy the livestock. You run cattle that you own on somebody else's property.

[00:36:27]And when you make that work, then you can think about owning property yourself. But again, to me, land ownership is the reward for building a successful ranching business. Owning the land is not essential for getting started and it is not essential for having a profitable business. The longer you can avoid it, the better off you would be.

[00:36:55]This shows the impact of in essence stocking rate on the overhead cost per cap. And we're we're just going to look this total up. So here we we've already established this property would support 500 cows if we're managing it effectively. Right now for whatever reason we only have 50 cows on the property. Our overhead cost of cow is over $2,000.

[00:37:23]Well let's see. Our operating cost is $1,143.

[00:37:28]Um here's our overheads at 2,000.

[00:37:33]Cavs are worth a lot of money right now, but they're not worth $3,500, which is what it would take to pay pay both operating and overhead at that level. As we bring the ranch to a higher stocking rate because we are managing it effectively and we are building the carrying capacity through good management choices. We get this to total overhead over here. 500 cows in place and we only have $300 in overheads per cow.

[00:38:09]And let's take that $1,800 uh revenue per cow that we were talking about earlier. If we have $300 um dollar overhead cost per cow, that's only 16%.

[00:38:23]That is a very very good overhead ratio in a cow calf operation.

[00:38:31]And I do know outfits, a number of them, you know, on the planes and into the west whose overhead cost per cow is $300 or less. But okay, uh I used the example uh yesterday of that McInn ranch in the Sand Hills 8,964 acres where I said in where they put in the big pipeline system, the fences and in three years time doubled the carrying capacity of the ranch. Now I said they didn't go from running 400 cows to 800 cows. They are running the equivalent of 800 cows. But the other 400 cow, they kept 400 cows. That was their base herd.

[00:39:17]That capacity, the forge consumption they're getting, that is the uh equivalent of 400 cows. That is being done entirely with custom grapes.

[00:39:31]Why?

[00:39:32]because he couldn't afford to buy 400 e even you know 2014 we like I said we did that project in 2014 15 I think so we were just past the peak maybe he could have afforded to buy you know cows on the downside of that cattle cycle I don't know that le personal level of finances for him but he made a choice that he would take all of that extra grazing capacity harvest it with custom grazing enterprises and avoid having to make that investment in 400 more cows.

[00:40:10]All right, so now we're going to start looking at how changes in operating costs and overhead costs can affect um the bottom line of the business. So this is an old old example.

[00:40:28]All the numbers in here are outdated, but there are such nice graphs and I no longer have the program that makes graphs that are that nice. And so I don't update it and change it every time the market changes because the basic principles that I'm talking about do not change. And Broken Hungry has the capacity of running 500 counts. Now in this example because I did this when I was young and foolish uh you know I showed with previous table that as we go from 50 cows to 500 cows that overheads actually are increasing and so this line realistically should be gradually sloping upward.

[00:41:17]Um, but we're just using that as a baseline here. And whether we have any cows on this place or not, it's going to cost us $80,000 just for the privilege of having the ranch. From a labor standpoint, I talked about the American aspect. Uh, yesterday in thinking about labor uh requirements for cow calf herd, American Extension Service usually says 3 to 500 cows uh per full-time employee.

[00:41:47]I talked about Desireette at being at a thousand. I have here highly successful ranches in the US greater than 800 cows per employee. The national standard in Australia, you know, from their Bureau of Labor or whatever. The expectation is 1,500 animal units or cows per employee on the really good well-run outfits in Australia. 3,000 animal units per employee is expectation. Does that mean that Australian ranchers are that much better than American ranchers? No, it just means they have a completely different business model.

[00:42:36]So most of you, if you're out in the pasture and you have a find a cow that's having cving difficulty, what do you do?

[00:42:48]Well, you try to get the calf out of her alive. You try to get her to stand up.

[00:42:53]Try to get the calf to get up and nurse.

[00:42:55]And you know, you just kind of hover around them and you work on it. Just got to save that cast. Got to save that cast. You know what the Australians idea of assisting a cow having a difficult birth is? Bam. And then you ride on. It's just a production unit. It wasn't LC or Bessie or anything like that. That was just a dysfunctional, you know, that was a broken production unit.

[00:43:21]Let's put it in the junky. Oh man, that's kind of tough to tell our consumers, isn't it?

[00:43:28]Uh but it's a different business model.

[00:43:31]You know, in most of Australia, there there is a small area of Australia that's tempered climate where they actually make some hay and feed some hay, but the vast majority of Australia, the very idea of making hay and feeding hay is for it. So they never have that cost. Um so that's the the difference. It isn't because they're better ranchers than we are. It's they operate in a very different business model than we did.

[00:44:01]This is this uh picture. This was at the Matador Ranch that was owned by the Koch brothers um what Blacktail Valley uh out east from Dylan, Montana. Um there's 3600 cows in that herd most of the year. Two men take care of this. Now, this is southwest Montana fed hay for 90 days over the last 40 years. And over half of that hay was in one winter. The winter I believe was 7778. It was either 7778 or 7879.

[00:44:44]For the most part, two guys, you know, take care of it. That's 1,800 cows per employee. Uh they ranch out on their own for the most part. Aren't they gray year round? Um Rubert Murdoch actually owns this place now. Um not Koch brothers. Uh but that is pretty good labor efficiency there.

[00:45:10]Do they have a 96% breed up rate and 92% live calf to the weaning pen rate?

[00:45:17]Probably not. But you know what?

[00:45:21]When I first visited this ranch in 2005, their cost to carry a cow was less than 50% of the national average.

[00:45:32]Their break even cost of production uh for a wean calf was 54 cents a pound.

[00:45:38]That's pretty good. Again, what I see all across the country, over capitalization in equipment, especially small to mediumsiz ranches. This is what really sinks the business. They own more equipment than what the cattle can pay for. Remember I mentioned that uh operation with 14,000 cows that uh the only difference between it and the guy who had 29 cows was they lost way more money uh 14,000 cow operation.

[00:46:16]You know what the biggest killer in their business was?

[00:46:21]the fact that they owned four tractors, four bailers, four swaths, four stackers, and all these other things.

[00:46:29]And uh they did do some uh no tail interceding of stuff. And of course, they had three 30 foot no drills, 14,000 cows, and they still couldn't pay for all that stuff. That was the biggest change, you know, that they made in their business. Oh, and they dropped from 14,000 cows supported with harvested feed to 8,000 cows grazing here around and became a money making business.

[00:47:03]So, what is cow depreciation? It's the difference between the purchase price of that cow and the salvage price when she gets sold as a cow spread over the number of calves she produces in her lifetime with interest charged. Because if you bought a cow, now I know nobody in this room would do it, but you know, some of your neighbors this summer have been buying 2500, $3,000 cows. Um, that's an investment made and you want a return on your money. So, we need to figure an appropriate interest rate for the time period that you have that $3,000 tied up in that animal. Okay? If you own a cow herd, you'll incur depreciation. Therefore, it is an overhead. That is the way a lot of the classic a economists at the various land grant universities look at this.

[00:47:57]You know, whether we're talking about K State, University of Nebraska, University of Wyoming, if you look at how they're analyzing and budgeting things, they are usually putting this as a overhead. But but we incur it every year because some percentage of the herd is getting called and liquidated every year.

[00:48:18]So this is an ongoing every year process and that is why I put it as an operating cost. We do tend to spend less per cow.

[00:48:31]Part of this is simply volume buying.

[00:48:34]you can buy stuff cheaper like mineral salt vaccines if you're dealing with 500 cows compared to 50 cows. Uh some of the the day labor efficiencies come here but basically as we go from our 50 cows to 500 the variable cost per cow is going to come back. Now, we set that line on top of the blue line and at a low level of animals, we're not, you know, there we were spending $100,000, but by the time we get out here to the big herd, you know, we're over $200,000 that we're spending. Now I have this green line coming up and this is cash revenue figured at $500 per cow annually. Oh boy. Now you know how old this graph is and how out ofd these numbers are. Well, we could take our $80,000 overhead and put it to the $150,000, you know, that I showed in one of the tables. And we could put our variable cost at that $1,143 that um LMIC showed for 2024.

[00:49:53]And then we have, you know, $1,400 in cow cost. And if we bump that cash revenue up to $1,500, the picture would come out very similar to this one here.

[00:50:09]We have a certain level of overheads. We have a certain level of operating costs and we can't make money.

[00:50:18]So if we were to reduce overheads by 25%, what happens? Well, this base this baseline here drops from 80,000 down to 60. And lo and behold, now our lines, our revenue line ends up being higher than the cost line. Yay, we've made money.

[00:50:40][snorts] The break even herd size is now 420. So basically, we have the uh revenue from 80 cows. Now that's gone directly into the profit line. Well, that's pretty good. So you say, "Well, how are we going to reduce overhead by 25%." You don't have that list memorized, but I'll tell you that equipment depreciation was $20,000.

[00:51:07]So one of the ways we could reduce our overheads by 25% or $20,000 is get rid of that equipment.

[00:51:18]Uh I mentioned Greg Simons yesterday. I believe he was Burke Tiger's associate in the desireette system and he was basically the scundo. He was the guy at the field level who forced everyone in those ranches to get on board with a different business model. And this is my favorite line from Greg. The only bad thing about ranching is farming.

[00:51:43]Get out of farming and it's better. And then at uh ranching for profit and their executive link program, this was a summary in one of the reports one year.

[00:51:52]And the most profitable ranches in the ranch for profit executive link ranchers are those with no farming operations.

[00:52:00]If you're going to be a rancher, be a rancher because being a farmer trying to ranch generally is not successful. Let the livestock do more of the harvesting, grazing, stockpiled pasture rather than you mechanically harvesting it. Let the animals do it. Increase land use efficiency. Get more out of every acre.

[00:52:26]And that's what management intensive gracing is about. Increase the productivity of our land through more effective management.

[00:52:34]The more pounds of beef that you can produce from any acre, it lowers the cost per pound of production for every one of those pounds, regardless of where we're on rangeand, high rainfall, natural pasture, irrigated. That's the basic principle you have associated or costs associated with an acre of land. Doesn't matter what kind of land it is. Yeah, those costs are going to be different, but every acre of land has a cost associated.

[00:53:07]If we can increase the output per acre in any of those situations through more effective management, it's going to lower our cost of production. So, the impact of management of this is uh looking at the situation in Idaho where we were. So, I had neighbors that I spied on. I knew how many cattle they ran uh from Google Earth photography, you know, I could measure the size of the pasture. All I had to do was look out and see when the cattle arrived on that place and either when they left or when they started feeding hay there. And I probably have a better record of what their production is than they do. And looking at three neighboring properties, basically 120 to 140 a per acre. the ranch that we moved on to, the fellow who was managing and we we as I think I mentioned, we lived on and managed one unit of a larger ranch system uh just in exchange for living on that property. So on this pivot here from 1997 till 2004.

[00:54:17]So we arrived here the fall of 2004.

[00:54:21]His seven years of running that rotation, 3 to 5 day grazing periods. And so that was typically given him about 28 to 35 days recovery.

[00:54:34]Um 185 cow days per acre is what he was uh averaging which is about 2 7 tons to the acre. So, he was getting 50% more per acre than what conventional management management on the neighboring. Now, my 18-year average on this property was 242.

[00:54:56]So, the 2009 was a very good year, but you know, I like to contrast what can be done. That's 4.7 tons to the acre. So, 2 and a half times more than what the neighboring properties were doing. Our best paddics out there were over 400 AUDs per acre that year. Um, and we in we invested uh in stock tank pipelines and some permanent fencing, but we did most of the management with polywire fencing.

[00:55:32]And this we did that in 2005 and 2006.

[00:55:37]the infrastructure development there and we were under $30 an acre um at that time when we did it. I recently did the same configuration using today's prices and today it'd be about $120 a acre to make the same infrastructure.

[00:56:00]uh increase labor efficiency uh or reducing overheads, increasing labor efficiency. And so here we're going to say, all right, what happens if we reduce variable cost by $100 per cap?

[00:56:16]And that brings our variable cost down to this point and our break even herd size is now $265.

[00:56:26]And you might say, well, how are we going to save $100 per acre in variable cost or $100 per cow? That is a very typical number that we see when people switch from primarily feeding hay to primarily stockpile grazing. Save up 100 plus dollars per cap. So that's how we we have now dropped our overhead cost by 25% because we got rid of our hanging equipment. We've compensated for not having hay by more effectively grazing an extended season. Um, and because we're not feeding hay, we're grazing.

[00:57:07]We've made that $100 and uh labor cost savings. Let the cows harvest more of their own feed. And that brings us to starting talk about stockpiling.